Camp Verde, AZ 86322
928-284-9840 (Main)
928-284-1478 (Fax)
800-822-1031 (Nationwide)

Seller Finance

Options for Seller (Exchangor) Carryback Financing

IMPORTANT - If the Exchangor agreed to provide financing for the buyer or Relinquished Property these decisions must be made prior to closing!

If the Seller plans to complete a §1031 Tax Deferred Exchange and intends to offer financing to the Buyer of his existing property he is combining an exchange with an installment sale (§453). Both have very different tax ramifications and he should consult with his tax advisor before the sale closes. The following information is provided as a general guideline for the Exchangor and Tax Advisor to take into consideration.

The terms of a normal exchange agreement call for the Qualified Intermediary to step into the seller’s (Exchangor’s) position prior to closing. If the Purchase Contract calls for seller financing, the Qualified Intermediary should then become the beneficiary of that financing. However, If the Exchangor wants to have the proceeds taxed when the principal is paid, then he must instruct the settlement agent and the Qualified Intermediary that only the portion of the sales price that is not financed will apply to the exchange. The Qualified Intermediary will then prepare the exchange documents accordingly and the financing documents will name the Exchangor as beneficiary at closing (i.e. $100,000 sale, $20,000 financed, Q.I. assigned in to 80% of sale).

If the Exchangor intends to defer the gain on the entire sale, including the financing, the Qualified Intermediary MUST be named as the Beneficiary in the financing documents PRIOR to closing and the Exchangor then has the following options to consider:

Assignment to Seller of Replacement Property

If the Seller of the Replacement Property agrees to accept financing secured by the Exchangor’s Relinquished Property as part of the purchase price, Qualified Intermediary will assign the financing documents to the Seller and deliver them to the Replacement Property settlement agent for recordation at closing. In this event, the financed portion of the sale proceeds are deferred and the Seller of the Replacement Property will receive all payments and principal on the amount financed.

Sold to Third Party

If, prior to the acquisition of the Replacement Property, the Exchangor can arrange to have the financing documents purchased from the Qualified Intermediary by an unrelated third party at face value or discounted, the gain is deferred.  (The buyer and the purchase price is determined by the Exchangor.) Funds are deposited into the exchange and the documents are assigned to the third party. The funds are combined with the Exchangor’s other proceeds and used to acquire Replacement Property.

Subsequent Purchase by Exchangor

The Exchangor may subsequently wish to purchase the financing documents from the third party. The third party would then assign the financing documents to the Exchangor. (This subsequent purchase could be subject to step-transaction doctrine if the Exchangor advances cash to the third party and then cancels the indebtedness in exchange for the original financing documents. Please consult your tax advisor.)

Paid in full prior to acquisition of Replacement Property

If the financing is paid off within 180 days of the Exchangor’s sale, prior to closing on the Replacement Property, funds can be deposited with Qualified Intermediary and used to acquire the new property.

If none of the above options are done prior to the completion of the Exchange, Qualified Intermediary assigns the financing documents to the Exchangor and that portion of the exchange reverts back to installment sale status.